Question

Sub: Advanced Federal Taxation

Sam, Stan, Sue and and Sean have have a partnership in which each of them own a 25% interest in the business. The books are maintained by a CPA who set it up based on the cash method of accounting. The balance sheet has Cash, Accounts Receivable, Inventory, Equipment, Land and other assets.

Sam wants out. He is thinking of different alternatives that might be used to terminate his ownership. The ones he has come up with so far are:

• Selling his interest to an outside person.
• Asking the other partners to buy him out.
• Asking the partners to distribute some partnership assets to him in exchange for his interest in the business.

Discuss the tax issues associated with each of the alternatives Sam is proposing. Which do you think is the best alternative for Sam and his partners?

Answer 1

Answer:

On the off chance that the active partner stays in partnership for over 1 year, the gain so caused will to be viewed as long term capital gain.

Then again, in the event that if remaining partnerts purchases the active / outgoing partner share, it tax provisions will be comparative as above. The sum so got as sales continues will be utilized as the premise and the active partner's tax premise in association will be deducted from the equivalent to show up at the taxable income.

On the off chance that the partners consent to appropriate the partnership asset for the active partner, at that point for this situation, the tax premise of the active partner will be deducted from the estimation of the asset received. This will decide the gain and misfortune to the active partner. (IRS 761_Taxation of partnership)

In the given case Sam, one of the 4 partners in the partnership association chooses to move out of the partnership, he has been asked either to the sell his share to some outside individual or to the partners or can take assets from the organization. In light to the above provisions, Sam will be obligated for all tax assessment the association isn't laible for any tax collection. In all the three case, Sam's tax premise in the association will be deducted from the sales continues from the outside individual or from other individual or from the estimation of the asset so got. The parity will be either being an tax gain or misfortune.

From the viewpoint of Sam and remaining partners, the subsequent choices of selling the share to remaining partners are better. It isn't from tax point of view yet from the viewpoint of control.